A friend of mine is concerned that the existence today of excessive executive compensation is leading to the accumulation of disproportionate wealth and economic and political power in the hands of a few.

No one doubts that individuals try to better their condition.

Business leaders such as Warren Buffett and Charlie Munger of Berkshire Hathaway are critical of excessive executive compensation.

Munger states that Berkshire Hathaway, a large holding company, owns many companies with boards of directors. Munger says that Berkshire Hathaway does not pay directors fees to non-executive board members of its subsidiaries. Munger said that if you start paying directors “it creates a daisy chain of reciprocity where they keep raising the CEO salary and he keeps recommending more pay for the directors”.

Munger suggests that directors should serve without compensation like members of the boards of trustees of universities in the U.S. who do not receive compensation other than some travel and per diem expenses.

What is excessive executive compensation? Across the Standard & Poors 500 Index of companies, the average multiple of CEO compensation to that of rank and file workers is 204 (per 2014 Bloomberg L.P.). The American Federation of Labor states that the average multiple of CEO compensation to the average worker is 355. The AFL states thatCEOs at S&P 500 companies in 2012 earned on average $12.3 million and the average worker took home $34,645.

In Japan the multiple is much lower. PriceWaterhouseCoopers estimates that for companies listed on Japan’s stock exchanges that executive compensation is about 16 times that of the typical Japanese worker (See Bloomberg Business Week July 11, 2010). In 2009 the chairman of Toyota Motors earned $1.5 million.

The state owned Industrial & Commercial Bank of China is the largest bank in the world with over 400,000 employees. The bank’s CEO earns about $326,000 per annum or 1.6% of the compensation of the CEO of JPMorgan Chase, a U.S. bank. Xi Jinping, the General Secretary of the Communist Party of China is about to reduce the “unreasonably high” incomes of bankers at state owned banks (see Bloomberg Businessweek September 28, 2014).

Charlie Munger said in a May 4, 2014 interview that it is “insane” to suggest that CEOs would not be as good at their jobs if they made a little less money. Also some studies suggest that excessive executive pay can harm productivity, lead to poor decisions and may adversely motivate other employees (see Ruth Sullivan, Financial Times June 3, 2013).

A legislative remedy for excessive executive compensation is not likely to take place in North America. I suggest that individuals can vote with their pocketbooks for a culture of lower executive compensation by buying Chinese or Japanese products.

P.S. – Mr. Ben Bernake earned $199,000 in 2013 as Chairman of the Board of Governors of the U.S. Federal Reserve System.

Comments

Another great column. Mssrs Munger and Buffett have been very consistent over the years and should be emulated. In Forbes business journal in 1990 Dana Weschler quoted Buffett’s common sense:

“Warren Buffett, the most successful investor of this era, has strong ideas on the subject of executive compensation. “If I owned all of Disney,” says Buffett, “it wouldn’t bother me one bit to write out a check for $40 million after what Eisner has done. What bothers me is paying $2 million to some guy who hasn’t done anything.”